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Chipotle trades lower on Q4 earnings as traffic remains a concern; still looking for new CEO (CMG)

Chipotle Mexican Grill (CMG) is trading lower today following another disappointing earnings result. Last night, the burrito chain reported Q4 non-GAAP EPS of $1.34, backing out the tax reform benefit. Revenue rose 7.3% YoY to $1.11 bln. Same restaurant comps are always an important metric for CMG and that came in at +0.9%, which was slightly better than market expectations.

The increase in revenue was driven by new restaurant openings and to a lesser extent by the +0.9% comp increase. Comps increased as a result of an increase in the average check, including a 2.4% impact from menu price increases taken in select restaurants during Q2 and Q4, partially offset by a decrease in transactions. CMG opened 38 new restaurants during the quarter, and relocated or closed four restaurants, bringing the total restaurant count to 2,408.

Food costs were 34.2% of revenue, a decrease of 110 basis points YoY. The decrease was driven by the benefit of the menu price increases, cost savings on paper and packaging products, and relief in avocado prices during Q4. Restaurant level operating margin was 14.9% in Q4, an improvement from 13.5% in the prior year period. It was driven primarily by decreased promotional activity and lower food, beverage and packaging costs.

On the call, CMG said its second make-line sales including online, mobile and catering are the fastest growing parts of the business and management expects that growth to continue or even accelerate. CMG also plans to invest much more in its existing restaurants during 2018 and beyond to create a better dining environment, but ultimately to improve the overall experience and flow of its restaurants.

Digital sales hit new records in Q4 as CMG's second make-line sales were up 33% YoY. The digital sales mix was 8.6% of sales while two of its regions topped 10% of their overall mix. This digital sales growth has been led by mobile ordering, which is up 50% and the increase has been driven by the new version of its mobile app for Apple and Android. The new app features quick reorder of favorite or recent orders and the ability to receive, store, and redeem offers. In 2018, CMG will accelerate the rollout of its digitally-enabled second make-lines as at least 30% of restaurants will be outfitted with these new second make-lines by the end of 2018.

CMG is also testing new catering offerings which include options for smaller groups, more convenient packaging, and new lower priced options, all of which should help accelerate growth. The test includes catering options for as low as $9 per person and for groups as small as ten people, compared to its current catering which requires a minimum of 20 people starting at prices of $12 a person.

While still very early in Q1, January 2018 comps were +3.4%, a nice improvement from Q4 although this January had an extra day as CMG was open on New Year's Day for the first time. That day accounted for just under 1% in the comp but it's still a good start to the year especially considering that the first three weeks of January were impacted by a series of winter storms. As the weather has normalized over the past two weeks, comps have been running in the +2.5-3.5% range. However, Q1 comparisons will get tougher in mid-February and March, as warm weather last year caused comps to surge. Full year comp guidance for 2018 is in the low single digits with lower comps in 1H18 due to the tougher comparison, then improving in 2H18 as comparisons ease.

So why is the stock is the stock down? It seems that investors are disappointed with Chipotle still seeing sluggish traffic and there seems to be skepticism among analysts that CMG has a good plan to turn traffic numbers around.

As a side note, recall that in late November, CMG announced that its CEO and Founder Steve Ells would step down when a new CEO is named. The company provided an update last night, saying that the search for a new CEO is well under way. There's no update on the timing of when a new CEO will be named but the process is ongoing. It may take until they name a new CEO for investors to feel more confident that CMG is finally going to turn itself around.